ECONOMICS 1 Professor Kenneth Train 9/24/08 Lecture 8 ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley. Do not share, copy or illegally distribute (electronically or otherwise) these notes. Our student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. ANNOUNCEMENTS LECTURE Last time we talked about competition. Today we’re going to talk about monopoly , its polar opposite. Monopoly in its pure form involves one firm and barred entry into the market. It is very rare to have a pure monopoly. Even Microsoft, which owns 95% of the market, wouldn’t count; if it raised the price too much other firms could still enter. What’s another example of an unregulated monopoly? Student : De Beers. Do they own all the diamond mines? Oh they do. Then that’s a great example. Okay. I want to first look at how a monopolist sets price and quantity. We don’t have to make a distinction between a market and the firm because the market is the firm. The demand curve in the market is faced by the firm, which in most cases is downward sloping. It’s also not useful to talk about supply. The supply curve is not relevant to the monopolist—it’s an answer to an “if-what” question: if the price is X, what will the supply be? This is irrelevant for a monopolist because it can set its own price. Student : Would the demand curve be vertical? No, usually a vertical demand curve means people will buy the product no matter what. That’s not necessarily an aspect of monopoly. MONOPOLY: DEMAND CURVE The two ideas of a market demand curve and setting your own price are related. We are still looking at how a firm will behave. Now a monopoly in particular must lower the prices it sets if it wants to sell more. In the same way, if it wants to raise its price it will have to sell less output. This makes it look like monopolist firms are constrained in a way that competitive firms are not. This is true—the only way to sell more is to drop its price. Firms eventually lower the gap between what they sell and what the demand is. MARGINAL REVENUE Marginal revenue is the extra revenue firms get from selling one extra unit of output. Since it’s selling on a downward sloping demand curve, if it wants to sell more it must lower its price. Note that

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